Reserve Bank of India (RBI) Governor Raghuram Rajan says that no single data point or number will determine the cbank’s next move on the interest rate front.

The weak state of the economy, as well as the good Kharif and Rabi harvest, will generate disinflationary forces that will help, he says, “and we await data to see how these forces are playing out.”

In fact, persistence of inflationary pressures coupled with weak growth has complicated the policy decisions for the RBI. The biggest question buffeting the banking sector is: will the RBI keep on raising rates in its strategy to bring down inflation? While many economists forecast a hike in repo rate in the next RBI policy review, opinion is unanimous that the RBI will continue its hawkish stance.

While the recent rise in inflation may have been a catalyst to hike repo rates, an equally important reason is an implicit change in the RBI’s monetary policy framework, away from WPI inflation towards CPI inflation.

“This framework suggests that because of current high CPI inflation, the present repo rate has been persistently below the neutral rate, so recent repo rate hikes are intended to align interest rates to ‘real’ domestic inflationary conditions. With CPI inflation close to 9.5 per cent and deposit rates in an 8-9 per cent range, a positive real return to savers still calls for a further hike in the repo rate,” said Sonal Varma, economist, Nomura.

While the repo is likely to be made the operative rate eventually, the process of full normalisation of monetary policy appears to be a multi-month process.

Said Indranil Sen Gupta and Abhishek Gupta, India economists, Bank of America Meriill Lynch, “We grow more confident that the money market will switch to repo mode from MSF by late November as the Diwali cash demand works itself out. The RBI will likely seal this shift with a 25 bps final repo rate hike on December 18.”

Moves (on October 29) to support cash provided to banks through term repo to 0.5 per cent of bank deposits from 0.25 per cent previously should increase both the availability and lower the incremental cost of funds in the interbank markets.

“These will be the guiding principles shaping the terminal policy rate outlook, which